Cyprus : The Real Story

The predetermined, and rather farcically executed, theft of 6bn euro from the depositors of Cyprus banks and cooperatives is merely a first step to a bigger end. And that bigger end is the control of Cyprus' recently discovered vast natural gas deposits, and as a result lessening the EU's dependency on Russian natural gas.  This is not about money. With the massive bailout numbers we've all gotten used to now, any central banker could have found 6bn euro under his pillow had he looked, this is about ENERGY. The bankers want, what the bankers can't print. The politicians want power. The people suffer. Same as always.

Allow me to explain.

Everyone of course knows by now that Cyprus is bankrupt. With a bloated, grossly overpaid, richly pensioned and painfully inefficient public sector, out of control government spending, rampant corruption, malinvestment in key industries, a technically insolvent financial sector that dwarfs the country's GDP (8.5 times larger) and which incurred heavy losses on the Greek bonds they held when the Greek debt was restructured through the PSI (Cypriot banks carry on their balance sheets 152bn euro of decomposing assets with 23bn already classified as non-performing) , and government debt levels rising over the critical 100pc of GDP, Cyprus needed a bailout to a large extend recapitalize it's banks and to a lesser extend continue to meet it's debt obligations. They approached the EU and the IMF in June 2012 for an emergency loan to the tune of $17.5bn (the amount required started at 5bn euro and ended at 17bn through a series of upward revisions as more and more losses were acknowledged by the banks).  This is roughly equal to the islands total annual economic output.

A prolonged round of negotiations ensued with neither side pushing aggressively to settle anything for a number of reasons. The Cypriots were hoping to secure another loan from Russia (a 2.5bn euro loan was secured the year before) thus foregoing the need to subject themselves to an IMF intrusion, the AKEL government had its hands full already with the mishandling of a confiscated Syrian munitions shipment that exploded at the Cypriot army post where it was poorly stored, killing several people and taking down the islands largest hydro power plant in the process which had disastrous results on the islands economy.

The EU for their part felt that they would be better off negotiating (more binding) with the new incoming government, very likely to be led by the europhile Mr Anastasiades and his DISY party rather than the outgoing communist Mr Christofias and his left wing AKEL party. They were also trying to decide how a Cyprus bailout (a big part of which was saving their banks) wouldn't be construed as a Russian oligarch and Russian "black" money bailout (they have 26bn euro deposited in the Cyprus banking system), money that was siting in Cyprus banks,  to the German electorate that was starting to create political headaches for frau Mekel. But the key thing, with significant American input, they were hoping that the Cyprus bailout can be leveraged into something a lot bigger……..redrawing the EU's energy map.

In late 2011, Noble Energy Inc., an American energy exploration company, announced the discovery of a substantial natural field just off the south coast of Cyprus which was estimated to hold as much as 8 trillion cubic feet of natural gas. Noble's discovery was merely a confirmation of previous exploratory work in the Levant Basin which in total has been estimated to hold 122 trillion cubic feet of natural gas, with about 20pc (the northern part of the basin) in Cyprus territorial waters. The potential for deep water oil reserves at the sight was estimated at 3.7bn barrels. This subterranean field became known as Cyprus Block 12.

Due to the enormous costs involved in drilling offshore and then transporting the extracted natural gas to either a connection hub to existing or proposed pipelines or to a terminal for liquification, the Cyprus government looked to establish partnerships with other countries. They looked to Israel and bankrupt Greece for support as both of those players were advocating the creation of a distribution hub in Greece as the best way of delivering the Levant Basin natural gas to the European markets.  The alternative was routing it through Turkey which Cyprus and Greece would not support for obvious political reasons and Israel would not support as a result with their deteriorating relationship with Erdogan's Turkey (Gaza flotilla kerfuffle and other minor confrontations). The Cypriots also made a concerted effort to bring in and involve the private energy company sector which was already showing a keen interest in the huge find. They invited bids for the development of several parcels of the find which had been divided into 12 parcels for future exploration and development. The estimated revenues to Cyprus, when ultimately (2018-20) this natural gas is brought to market,  vary widely but most analysts have them in the range of $3bn to 5bn per year at today's natural gas prices, with an estimate from RBS even setting the total value of the entire find belonging to Cyprus (beyond just Block 12) as high as $600bn. Compared that with the islands GDP that is only about 17.8bn euro.

The discovery also ignited political tensions between the Greek-Cypriot south and the occupied north Turkish side, with the Turkish side trying to stake a claim to a part of this future revenue.  It also brought the island's long standing close relationship with Russia again in the political forefront (bare in mind at the time the left/communist party AKEL was in power),  with Gazprom obviously having a front row seat to the bidding process, with leverage on Cyprus coming directly from the Russian government by virtue of the 2.5bn euro loan they had extended to Cyprus to refinance debt, even before Cyprus had approached the EU for emergency assistance. In May 2012, Cyprus received 15 bids from international energy exploration and development companies to develop nine of the available 12 parcels in Block 12.

Here is where things get interesting.

Eurogroup president Jeroen Dijsselbloem was the first to tip the EU's hand by saying that future revenues from natural gas finds in Cyprus should be included in whatever bailout settlement was agreed to. Future revenues could be collateralized to service existing debt, or a special account could ultimately be set up under the control of the EU with the express purpose of collecting future revenues to service debt. The Cypriots of course resisted any agreement that brought the natural gas finds into play and pointed out that a preliminary agreement between them and the EU did not include mortgaging the island's new found energy wealth. But the the carpet was taken from right under their feet, all in the last two months, significantly weakening their position.

The American delegation at an international gas conference in Athens in January openly advocated and supported the routing of the Cyprus gas to the EU markets through Turkey. At about the same time the Israelis find new love for the Turks and they too throw their support behind the Turkish route. The bankrupt and corrupt Greek government predictably kept silent which now left the Cypriots totally isolated in influencing its own destiny on its own resources. And this was not so much about outflanking puny little Cyprus, it was about outflanking the Russians who with significant interests, investments and money on the island, with a nearly 50,000 people strong Russian community living there, and close economic and political ties to the island, would have a big say in the management of those energy resources.

The depositor haircut was intended to do way more than contribute 6bn euros to the banks recapitalization. It was intended to alienate the Russians who parked their money in Cyprus, shake the confidence and trust they had in the more than willing to accommodate them Cyprus banking system, and position the Cyprus government as completely impotent that takes its marching orders from the EU bureaucrats. It was all a "who runs Bartertown?" move by the EU/US partnership, with unfortunately the common Cypriot (who on average only has 2,500 euro deposited in a bank) lost part of his hard earned savings as collateral damage. The depositor haircut was part of a bigger play and a smokescreen obscuring what this is really all about, the redrawing of the EU's energy map, and lessening Russian influence. The haircut to depositors with deposits under 100,000 in contravention to existing depositor protection laws, and getting around the law by positioning the haircut as a tax, was nothing short of criminal.

Start to see the big picture.